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ESRI report shows effect of ‘Brexit’ on the euro and Irish economy

The issue of ‘Brexit’, Britain’s potential departure from the EU, is coming more into focus, with the UK set to vote in either 2016 or 2017 on whether or not to remain in the bloc writes Oliver Mangan Chief Economist at AIB.

The issue is beginning to get more attention as the UK government sets about renegotiating Britain’s membership terms of the EU, looking for concessions in areas such as migration, sovereignty, and competitiveness.

Most opinion polls point to a vote in favour of remaining in the EU. However, the polls have been quite volatile and the current lead is not that large, with one poll even pointing to a vote to leave.

Brexit would pose many risks for the UK, and thus key trading partners such as Ireland, as highlighted in the report last week by the Economic and Social Research Institute (ESRI).

It could impose significant costs on both the UK and those countries trading with it. There is no suitable, ready-made template for the UK to adopt as the basis for a trade deal with the EU in the event of a Brexit.

Indeed, the UK is likely to have to continue to adhere to EU regulations to maintain access to EU markets. Not surprisingly, most studies show that Brexit would have a negative impact on the UK economy. It could take up to a decade for the full economic impact to be felt in terms of foreign direct investment (FDI), trade flows and GDP.

There would obviously be negative knock-on effects for Ireland, given its close economic ties with the UK. It is very difficult to quantify the full macro-economic effects of Brexit on the UK and Irish economies. We do not know what the post-Brexit trade arrangements would be between the UK and EU, and these will be critical.

Brexit would also be a prolonged and complicated process, creating much uncertainty. Such uncertainty is likely to have a considerable negative impact on economic activity, although the full effects are hard to quantify.

The UK would not have a veto over its final EU exit terms, adding to the uncertainty. FDI into the UK is also likely to be badly impacted by Brexit, especially if there is uncertainty over the continuation of free trade with the EU.

Ireland has very close trade and economic links with the UK and so would be impacted greatly by Brexit. The UK is a very important market for Irish exports. The ESRI suggests that Irish trade with the UK could fall by some 20%.

Those trading with the UK would also face increased administrative and regulatory costs. The most immediate impact for businesses, though, of a vote for Brexit is likely to be on the exchange rate.

The euro has fallen by more than 20% against sterling since 2010, declining from 90p to around 70p at one stage. We would expect sterling to surrender some of those gains, if the markets begin to suspect that the UK may vote to leave the EU.

A vote in favour of Brexit could see sterling fall sharply. However, one reason that the UK may well vote to stay in the EU is that it is very unclear what Brexit would lead to precisely. No one can say with certainty what the post-Brexit landscape would look like for the UK. Brexit, in reality, is like buying a ‘pig in a poke’.

Indeed, a key issue is that, the more the UK seeks to regain control over policy and regulations, the more difficult it will be to negotiate a free trade deal with the EU that negates many of the downside risks for the economy of leaving.

In order to secure a worthwhile trade deal, the UK is likely to have to continue adhering to EU rules and regulations and also make a contribution to the EU budget, as Norway does.

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